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30.01.2020, 10:36

The uncertainty within and beyond the virus

About two weeks after the first death from the coronavirus which started in the Chinese city of Wuhan, the World Health Organization (WHO) changed its international risk assessment from medium to high. Behind this change is the rapid increase in the number of deaths that the virus has already caused - 106 deaths in 18 days - this number is higher than the one registered by the SARS coronavirus at the same time in 2002. Moreover, a total of over 6,000 cases were detected in more than 15 countries including France, Japan and the United States by Jan. 29 and the virus continue its rapid spreading.

As a result of these events and the uncertainty of a further spread of the virus, investors began to take greater precautions. The possibility of a decrease in demand and consequently in consumption as well as the economy led to a sharp drop in the main world indices.

On Monday Jan. 27, the main European reference index Stoxx600 ended up having a very sharp fall (-2.26%), ending up offsetting all the gains achieved since the beginning of the year. The same happened in the other European stock exchanges, and particularly in the Portuguese case, PSI-20 depreciated 2.0%. Hang Seng index on the other hand plunged by almost 3% at the opening on Jan. 29 after four day holidays in China. The demand for more safe assets started to increase across Europe, which led to an appreciation of the treasury market leading to a fall in sovereign bond yields. Also, Brent's oil depreciated 3% while gold rose considerably.

Coronavirus fears could hit travel globally, and produce a decline in consumer spending in Asia and the U.S. But the effect tends to scatter pretty fast. "These retrenchments in spending are short-lived as consumers eventually get frugal fatigue," said Jay Bryson, acting chief economist at Wells Fargo Securities. Virus could hit consumer spending and travel and that there could be enough to undermine economic growth. But again, the effect will probably be limited. "The negative impact on growth and asset prices from viral outbreaks typically normalizes within a few months," says Andrew Tilton, the chief Asia economist at Goldman Sachs.

On Jan. 28, however, markets closed on positive ground, partially correcting previous trading day's losses. The main European indices appreciated, while bond yields of most European countries rose. In Portugal, for example, the 10-year bond yields increased by 3.1 basis points. In addition, the price of oil increased, while gold appreciated.

It should be noted that the consequences seen in financial markets, are only the result of uncertainty regarding the future development in the transmission of the virus. It is very unlikely that these events have already adversely affected the real economy. However, Moody's rating agency warned the economic consequences from the virus could be comparable to SARS in 2003. The SARS outbreak wiped out $40 bln from Chinese economy that year. The world economy losses totaled $59 bln. Those were only direct losses economy has suffered. The Chinese health minister Ma Xiaowei has warned that the number of victims will continue to increase and that they have started to develop a vaccine. Furthermore, it is good news that no clear signs of mutation have yet been detected, however this does not mean that it cannot happen in the future.


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